The Fed Bets on a ‘Soft Landing,’ but Recession Risk Looms

Central bankers have been clear that they will do what it takes to control inflation. They are betting on a soft landing, but a bumpy one is possible.

Jerome H. Powell, the Federal Reserve chair, emphasized this week that the central bank he leads could succeed in its quest to tame rapid inflation without causing unemployment to rise or setting off a recession. But he also acknowledged that such a benign outcome was not certain.

“The historical record provides some grounds for optimism,” Mr. Powell said.

That “some” is worth noting: While there may be hope, there is also reason to worry, given the Fed’s track record when it is in inflation-fighting mode.

The Fed has at times managed to raise interest rates to cool down demand and weaken inflation without meaningfully harming the economy — Mr. Powell highlighted examples in 1965, 1984 and 1994. But those instances came amid much lower inflation, and without the ongoing shocks of a global pandemic and a war in Ukraine.

The part Fed officials avoid saying out loud is that the central bank’s tools work by slowing down the economy, and weakening growth always comes with a risk of overdoing it. And while the Fed ushered in its first rate increase this month, some economists — and at least one Fed official — think it was too slow to start taking its foot off the gas. Some warn that the delay increases the chance it might have to overcorrect.

The Fed has touched off recessions with past rate increases: It happened in the early 1980s, when Paul Volcker raised rates in a campaign to bring down very rapid inflation and sent unemployment rocketing painfully higher in the process.

“There is no guarantee that there will be a recession, but you have high inflation, and if you’re serious about bringing it down quickly, you have to hike a lot,” said Roberto Perli, the head of global policy at Piper Sandler, an investment bank, and a former Fed economist. “The economy doesn’t like that. I think the risk is substantial.”

It is no surprise that it can be difficult to cool down inflation while sustaining an economic expansion. Higher borrowing costs trickle through the economy by slowing the housing market, discouraging big purchases and prompting companies to cut expansion plans and hire fewer workers. That broad pullback weakens the labor market and slows wage growth, helping inflation to moderate. But the chain reaction plays out gradually, and its results can be seen only with a delay, so it is easy to lay on the brakes too hard.

“No one expects that bringing about a soft landing will be straightforward in the current context — very little is straightforward in the current context,” Mr. Powell acknowledged during his remarks this week, adding, “My colleagues and I will do our very best to succeed in this challenging task.”

Six of the eight Fed-rate-increase cycles since the early 1980s have ended in recession, though some of those were caused by external shocks — like the pandemic — and some by asset bubble implosions, including the 2007 housing crisis and the collapse in internet stocks in the early 2000s.

Fed officials are hoping that today’s strong economy will help them avoid a rough landing. They point to the fact that labor markets are booming and consumer demand is solid, so lifting rates and tempering voracious buying might help supply to catch up and chill the economy without giving it freezer burn. Mr. Powell has argued that with so many open jobs per unemployed worker, the Fed might be able to slow down the labor market a bit without pushing the unemployment rate up.

Loretta J. Mester, the president of the Federal Reserve Bank of Cleveland, said the Fed was not at a point where it had to decide between fighting inflation or pummeling growth.

“Given where the economy is now, and where the risks are, to my mind the major economic challenge is inflation,” Ms. Mester told reporters on a call Wednesday. “I don’t see it as being a trade-off at this point.”

James Bullard, the president of the Federal Reserve Bank of St. Louis, said in an interview that he thought the fact that the central bank had credibility as an inflation fighter — and was raising rates to defend that credibility — could allow it to adjust policy in a way that allowed demand to moderate without causing major economic disruptions.

In the 1980s, when Mr. Volcker was the Fed chair, the central bank had to convince the world that it was prepared to wrestle inflation under control after more than a decade of rapid price gains.

“Do whatever it takes — I guess that’s the mantra of the day. I do think inflation is our No. 1 concern,” Mr. Bullard said. “I don’t think, however, that it is a Volcker-like situation.”

Near-term consumer and market inflation expectations have shot higher over the past year as inflation has hit a 40-year high and continued to accelerate, but longer-term price growth expectations have nudged only slightly higher.

If consumers and businesses anticipated rapid price increases year after year, that would be a troubling sign. Such expectations could become self-fulfilling if companies felt comfortable raising prices and consumers accepted those higher costs but asked for bigger paychecks to cover their rising expenses.

But after a year of rapid inflation, it is no guarantee that longer-term inflation expectations will stay in check. Keeping them under control is a big part of why the Fed is getting moving now even as a war in Ukraine stokes uncertainty. The central bank raised rates a quarter point this month and projected a series of interest rate increases to come.

While officials would usually look past a temporary pop in oil prices, like the one the conflict has spurred, concerns about expectations mean they do not have that luxury this time.

“The risk is rising that an extended period of high inflation could push longer-term expectations uncomfortably higher,” Mr. Powell said this week.

Mr. Powell signaled that the Fed might raise interest rates by half a percentage point in May and imminently begin to shrink its balance sheet of bond holdings, policies that would remove help from the U.S. economy much more rapidly than in the last economic expansion.

Some officials, including Mr. Bullard, have urged moving quickly, arguing that monetary policy is still at an emergency setting and out of line with a very strong economy.

But investors think the Fed will need to reverse course after a series of rapid rate increases. Market pricing suggests — and some researchers think — that the Fed will raise rates notably this year and early next, only to reverse some of those moves as the economy slows markedly.

“Our base case has the Fed reversing quickly enough to avoid a full-blown recession,” Krishna Guha, the head of global policy at Evercore ISI, wrote in a recent analysis. “But the probability of pulling this off is not particularly high.”

So why would the Fed put the economy at risk? Neil Shearing, the group chief economist at Capital Economics, wrote that the central bank was following the “stitch in time saves nine” approach to monetary policy.

Raising interest rates now to reduce inflation gives the central bank a shot at stabilizing the economy without having to enact an even more painful policy down the road. If the Fed dallies, and higher inflation becomes a more lasting feature of the economy, it will be even harder to stamp out.

“Delaying rate hikes due to fears about the economic spillovers from the war in Ukraine would risk inflation becoming more entrenched,” Mr. Shearing wrote in a note to clients. “Meaning more policy tightening is ultimately needed to squeeze it out of the system, and making a recession at some point in the future even more likely.”

(NY Times)

Minnesota Legislature: Week in Review: March 21-25

The session’s first committee deadline has come and gone — and the second is just a week away, on April 1. That’s the date by when committees must act favorably on bills, or companions of bills, that met the first deadline in the other body.

In other words, we’re in the thick of 2022 regular legislative session.

The invasion of Ukraine, climate change, felony murder laws, broadband, education policy, used car prices: lawmakers covered a lot of ground in recent days. Here’s a look back at what you may have missed. Have a good weekend.

Check out the latest gallery from House Photography and stay up-to-date on House news and updates throughout the week at Session Daily.



Grants proposed to fund secondary education of meat cutting, butchery



Farm to School grants could double, add child care providers




Is climate change part of the bonding discussion? Ratings agencies say it is




Judiciary panel lays over felony murder law reform bill




Provision allowing large brewers to sell growlers moves forward as part of omnibus liquor bill



Used car prices must be prominently posted under proposed legislation




Economic development panel approves bill to extend broadband internet service to hard-to-reach households



Bill aims to help build community wealth by supporting shared ownership




Omnibus education policy bill is unveiled, gets high marks from some



Legislation calls for end to disciplinary dismissals of K-3 students



Legislature could examine new ways to calculate compensatory revenue for MN schools




Bill proposes multi-pronged approach for easing MN’s human services workforce shortage



Millions in funding proposed to help workforce boards meet employment challenges



No action taken on proposed temporary extension of waiver for child care centers




Help could be on way for victims of polar vortex price spikes



Targeting more green innovation, bill would extend incentives to on-site energy storage




House environment panel OKs bill to appropriate $47 million from state’s Clean Water Fund



Environment and Natural Resources Trust Fund appropriations OK’d despite no LCCMR recommendation




Health panel hears bill to distribute free masks, COVID-19 antigen tests to Minnesota residents



House votes to reauthorize reinsurance program in individual market



House votes to fund $25 million on ALS research, family caregiver support



Health panel lays over bill on community-based dental care pilot project



House member hopes bill will spur discussion about end-of-life plans



Bill proposes tweaks to state’s substance abuse treatment licensing requirements



House health panel lays over bill to fund programs aiding trauma victims




Free college grant program proposed for Minnesota State schools to aid future workforce




Keeping housing affordable the goal of community stabilization bill



With MN short on housing, bill would push production to increase homeownership




More help for vets? Service officers and organizations could see more funding




Public safety panel approves $151 million bill proposing ‘innovative solutions’ to fight rise in crime



‘We’ve got to stop this behavior,’ says lawmaker sponsoring bill to punish disruptive spectators at youth sports



Lawmakers consider creation of Minnesota Outdoor Recreation Office




House passes plan to scrub state investments of ties with Russia, Belarus



Legislative task force proposed to examine long-term aging costs



Time for a rebrand? House lawmakers consider measure to redesign MN’s flag, seal




Minnesota businesses could get a tax credit for sending workers back to school



Could state’s surplus smooth way for eliminating taxes on Social Security benefits?




Could cameras slow MN’s speeding drivers? Legislation proposes pilot program to find out



With long waits driving customers crazy, lawmaker proposes plan to reduce frustration of getting new licenses, IDs


State Hits Lowest Unemployment Rate In 20 years As More Minnesotans Go Back To Work

Minnesota’s labor market continued its bounceback from the pandemic, with the state adding 5,200 jobs in February.

Minnesota’s unemployment rate in February shrank to 2.7%, a level not seen since 1999 and entirely the result of people who were previously unemployed entering the workforce and finding jobs, according to figures released Thursday by the Minnesota Department of Employment and Economic Development.

That’s a signal that people who were no longer looking for jobs after being pushed out of the workforce by the pandemic’s effects are increasingly looking to come back to work.

“A lot of times during the pandemic we talked about the unemployment rate going down not necessarily being a good sign since people were leaving the labor force,” said Steve Grove, DEED’s commissioner. “The good news is these recent dips in the rate are because people are coming into the labor force.”

The increase in jobs last month comes after a gain of more than 10,000 in January, the largest jump the state had seen for months. The state has gained back nearly three-quarters of the 417,000 jobs it lost in the first few months of the pandemic, Grove said. It’s still shy about 120,000 jobs from pre-pandemic levels.

“The labor force participation rate is ticking up, finally,” said Oriane Casale, DEED’s assistant director of its Labor Market Information Office. “It seems to be kind of across the board. We’re seeing positive trends for all of the three racial groups that we track, as well as for both women and men.”

The state’s labor market remains tighter than the national level – the country’s unemployment rate was 3.8% in February.

Though the state is in its fifth-straight month of job gains, inflation is outpacing wage growth. The state’s average hourly wage of $34.65 in early 2022 increased 7% from the previous year; the inflation rate is closer to 8%, according to DEED data. The only other year in the past decade that has seen inflation higher than wage growth was 2018.

Grove said his office is hearing from employers that some are boosting wages to attract workers in the tight market, but others are offering other perks, like flexible schedules, childcare subsidies and pet insurance.

“People are getting creative and those who are doing new things are seeing new results,” Grove said.

The state’s manufacturing, information, education, government, and trade and transportation sectors all saw monthly gains in employment. Construction, financial activities and professional services had decreases compared to January.

Despite the overall decrease in the unemployment rate, racial disparities continue. The unemployment rate for Black Minnesotans rose 0.3% in February and is twice that of white Minnesotans. Hispanic Minnesotan’s saw an improved rate last month, but it’s still higher compared to that of the white population.

(Minneapolis/ St. Paul Business Journal)


Walz Favors $500 Minnesota Stimulus Checks, Not Gas Tax Holiday to Ease Pain at the Pump

Minnesota Gov. Tim Walz is pushing lawmakers to pass bigger rebate checks instead of a gas tax holiday as inflation surges to levels not seen in 40 years.

Walz’s proposal calls for direct payments of $500 to adults who make less than $164,400 a year and $1,000 per couple making less than $273,470. He has tripled the size of the checks since he first proposed them in January, and his administration now estimates the cost at $2 billion. The checks are part of Walz’s updated spending plan released Thursday.

Politicians across the country are grappling with inflation — especially highly visible gas prices — with this fall’s midterm elections looming. Walz said a direct payment would be more effective than waiving the state’s 28-cent per gallon gas tax over the summer, as some House Democrats have proposed.

“It’s quite a few fill-ups that you could get out of $1,000,” Walz told reporters at a gas station in New Hope. “I think this money in the hands of folks before summer would make a good difference. And it’s fiscally responsible.”

Still, the first-term DFL governor said he would sign a gas tax holiday if the divided state Legislature passed one.

Under a gas tax holiday, relief would be much slower than with a one-time payment. The owner of a vehicle with a 15-gallon tank would need to fill up 119 times before saving $500. But a rebate check wouldn’t change the two-foot-tall, record-breaking prices displayed on gas station signs.

Republicans who control the Minnesota Senate call a gas tax holiday a gimmick. They have also been lukewarm to Walz’s one-time rebate checks, preferring permanent income tax cuts instead.

The Senate GOP has called for cutting the bottom income tax rate — which all filers pay on at least a portion of their income — nearly in half.

“If we can’t come to an agreement on that, I would be incredibly disappointed,” Senate Majority Leader Jeremy Miller, R-Winona, told reporters when asked if he would view the session as a failure without tax cuts.

With the 2022 session nearing its midpoint, lawmakers have stalled on every proposal to spend $10.4 billion of combined budget surplus and federal COVID-19 relief money. Income tax cuts, rebate checks, bonuses for workers on the frontlines of the pandemic, and business tax breaks are all no closer to passage.

Republican and Democratic lawmakers have dealt with split-party control in the Legislature since 2019. In recent days, Democrats have accused Senate Republicans of not wanting deals, in hopes of improving their hand in this fall’s midterms.

“The idea that you’ll run out the clock and maybe roll the dice that you’ll get the money to spend it all yourself, to me, it’s just not moral to do that,” Walz said, when a reporter asked about the possibility that the Legislature makes no deals this session.

Miller, the top Senate Republican, dismissed the criticism.

“It’s absolutely ridiculous we don’t want any deals,” he said. “Which chamber is passing bills with bipartisan support? It’s this chamber. The Minnesota Senate is passing bills with strong bipartisan support. Anyone who’s saying we don’t want to get deals done, it’s absolutely false, it’s absolutely ridiculous. It’s actually laughable.”


(Fox 9)